Notes From Underground: The euro melts; Greece burns; New Zealand sizzles

As our readers are all too aware, the EURO is suffering under the weight of arrogance. For months the policy makers in Brussels have thumbed their noses at the markets. They believed that jawboning and empty rhetoric would defeat the market forces that were beginning to exact their “pound of flesh,” for the ill-conceived policies that have afflicted the European Union (EU). The debt markets kept pushing and the policy makers kept ignoring the price action, but blaming it on greedy speculators. As usual, the callousness of the anti-market Eurocrats have created a crisis and now are forced to act. As Boris Schlossberg pointed out on CNBC today, this could have been delt with at a much lower cost. Now the financial price has escalated but the political price may well be existential for the European project.

Tomorrow we get the results of the ECB meeting so we will see if they move to renew the 90-day funding facility to relieve some of the pressure building in the EURIBOR market. Some analysts think that the ECB is going to begin buying European sovereign debt in the secondary market, what we referred to as a quantitative ease in an earlier note this week. If the ECB went to that measure, it would cause havoc in the markets as equities would find it supportive, the EURO would get hit initially and the GOLD would most likely go to new highs. The DOLLAR would have a short rally but the EUROPEAN crisis will keep the FED on hold longer than the markets now think.

Boston FED PRESIDENT, Eric Rosengren, alluded to the stresses that still remain in the global financial system. It is appropriate for the Aussies to raise rates but the FED has a much greater responsibility to the global system. The visual media was rejoicing as riots erupted in Greece and they got pictures to depict the credit crisis as process cannot be televised. We have repeatedly warned that the political situation in Greece was going to turn ugly but we believe this action seems to be a point of exhaustion as most Greeks support some type of austerity program. In European political theater, riots always appear as a way to get governments to crumble–think JOSÉ BOVÉ in France. The Greek government is a socialist government so there is a great incentive from labor to begin serious negotiations with Papandreou. We don’t wish to downplay the loss of life in the rioting but the anti-austerity voices will be forced to reason as the present government will hold to the line that the Greeks have no alternative to the EU. The bigger issue will be the German elections this Sunday and then following that will be a constitutional court challenge by some prominent German intellectuals. Some Greek leaders are also aware that they want to be the first ones to resolve their debt problems as there are certain to be more of the peripheries coming to the trough.

Tomorrow night we will be know the election results in the U.K. Many analysts predict that the election will result in a hung parliament. Interestingly, as the negative view of British politics hangs over the market, the EUR/GBP cross is nearing nine-month lows. Yes, that is certainly a result of the European credit crisis, but if the election is inconclusive and the GBP continues to gain against the EURO we can look for a test of the prices made during the weeks immediately following the Lehman Brothers collapse. We will also watch for the price action on the other POUND crosses for if the British currency were to strengthen against other developed currencies something bigger would be in the works–perhaps a rebalancing of central bank reserves as the British Pound has been shunned for more than two years. One caveat we will add: If Nick Clegg, the liberal-democrat, were to poll the highest, our view of potential POUND strength would be reversed. We cannot accept that any British politician could put forward the idea of the POUND entering the EURO currency with all the uncertainty surrounding the EU. It has been the POUNDS being flexible and depreciating when necessary that has kept the U.K. from being Greece.

The unemployment report out of New Zealand tonight showed robust job growth. The KIWI has been the best-performing currency for the last week, gaining almost 3% against its nearby cousin, the Aussie Dollar. Milk prices have been strong in Asia, which has created big profits for the Fronterra Milk COOP. There has also been chatter that China was adding to its KIWI investments believing themselves to be underweight New Zealand. Now as the jobs reports shows, New Zealand is growing and prior to the jobs release, RBNZ president Alan Bollard was talking about the need to begin to raise rates to put a brake on the economic growth supported by easy money. We believe that the AUSSIES are the only central bank ahead of the curve but Australia has been negatively impacted by this weeks announced tax increase on super mining profits. While Australia was the early recipient of the Asian led growth story, New Zealand is now beginning to catch up as we go from mining to agriculture.

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